Global insights are crucial to remain competitive in commodity trade

Due to increased transparency in the commodity trading market and the resulting smaller margins, one of the most significant global trends is that commodity traders are undergoing various processes to convert raw materials into products that can actually be consumed. The trade of agricultural, energy, and industrial commodities is often perceived as market-driven and focused on generating trading profits, sometimes with a negative connotation, states Craig Pirrong, Professor of Finance at the Bauer College of Business, in the report ‘The economics of commodity trading firms’. However, more and more commodity traders are operating between production and distribution, alongside other actors in the supply chain. By shifting from a purely trading role to a more merchant-oriented role, they create added value for their customers.
Creating Value
To create value, commodity trading firms must professionalize in logistics, storage, and transformation. Companies aim to identify the most valuable transformations, execute the necessary transactions to enable these transformations, and carry out the physical and operational actions required. Examples include access to mills, roasters, refineries, and steel plants. Creating value means understanding what customers want, at what time, in what quality, in which packaging, and at what price. Building long-term commercial relationships with buyers leads to deeper insight into their needs and requirements.

Commodity Trading and managing the value chain
Commodity Trading and Managing the Value Chain
At the same time, understanding and anticipating customer needs and requirements requires developing long-term commercial relationships with producers, ensuring they align with buyer demands regarding volume and quality. This leads to an increase in the use of long-term supply contracts and partnerships. To facilitate this, commodity firms must improve and optimize their logistics chain and IT infrastructure. These firms need to analyze buyers and sellers, study demand and supply patterns, understand pricing structures, and have a comprehensive view of transformation technologies. Given the complexity of these transformations and the constantly changing conditions affecting efficiency, this is a dynamic, complex, and highly information-intensive task.
Global Insights Are Crucial
Currently, traders in agricultural commodities are rapidly adopting these changes. For example, grain is harvested only during a specific period of the year. How can commodity traders ensure a year-round supply to their customers? What are the best ways to store grain, maintain its quality, and extend its shelf life? It is evident that IT infrastructure must also transform to provide a global overview of all variables and enable effective collaboration with all players in a dynamic and successful manner.
Having full visibility into short- and long-term demand and supply, inventory and production planning, as well as customer and market trend analysis, is essential for commodity traders to optimize their value chain and differentiate themselves. To remain competitive in commodity markets, global insight is crucial for every trading company.
This blog is the first part of a trilogy on the key changes in commodity trading: the development of the supply chain and its relationship with the necessary IT and data architecture.

Bart Dix
Managing Partner
Want to optimize your commodity trading value chain?
Curious how the right IT and data architecture can give you insights into supply, demand, and transformations? Get in touch with me and find out how we can support you!